The recent collapse of the alternative investment scheme Cash Plus and now Olint, with losses estimated as high as $200 billion, has a lot of people asking the question: What has happened? Some persons believe that it was the formal financial sector which brought down the schemes. They say that the sector was concerned about losing funds to the informal sector and conspired to bring about it’s downfall by pressuring the financial services sector to close down the companies.

Others believe that the companies were nothing more than pyramid schemes. A pyramid scheme operates on the basis that money is paid out of new proceeds being received and not on any earnings that are generated. This scheme obviously will depend on people continuing to bring in new money which will only happen as long as there is confidence in the scheme. Of course given that no income is being generated, it will inevitably fail.

While I applaud the efforts of the companies to spread the wealth around, they failed to use some basic investment strategy. In the case of Cash Plus they forgot that you do not use short term money to invest in long term assets such as businesses and property. Secondly, both companies breached the rule that if you are taking money from persons you must be able to account for it by refusing to present financial statements. One of the main aims of this blog is to inform readers about basic investment strategies and to promote discussion on current happenings.

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The stock market has collapsed – since Sept. 19 the DJIA is down 25% and the S&P 500 is down 28% and down 42% from a year ago.

How can this happen so quickly and so dramatically when so many good things have occurred? Oil is down to $82 a barrel; interest rates are very low; the dollar is up; valuation levels are extremely attractive among many blue chip stocks.

What’s the real problem? The problem that is killing the stock market is a lack of hope about the future.

Hope springs from optimism that is based on facts and history. Look at the history of America and really all of mankind. Life is full of setbacks and problems – that’s just the deal. But this too shall pass, as all scary periods have.

Doomsayers have been around forever and their batting average is zero. Buying stock is based on hope – hope for the future. If one doesn’t have hope, they shouldn’t be in this business.

So what is the best service we, as professionals, can provide for our clients?

First, discuss the fact that we are dealing with serious problems but it is not at all like 1929. The Federal Reserve and the Treasury Department are doing many things to restore confidence in the financial system. There is global coordination in attacking the problem, which is lack of confidence.

Tell your clients to look at history of our great nation and what has happened since 1776 when we faced very serious problems. The stock market actually rose steadily about six months after Pearl Harbor and until the end of WWII even though the outcome was not at all clear for several years.

No one knows when the stock market will bottom and a new bull will commence. We do know that stocks and mutual funds offer the best values we have seen since Black Monday, Oct. 19, 1987.

Almost all Americans have hope about the future of our nation, but they need help to control their normal fears.